Public Debt Management and the Government Securities Market[22]

2004). Consequently, poor debt structures could be obvious signs of weakness in the debt management framework, particularly in the risk management framework.

The Guidelines for Public Debt Management (IMF and World Bank 2003a) could be used as a framework to review debt management framework and practices. Note, however, that the guidelines should not be viewed as a set of binding practices or international stan­dards against which countries are to be assessed. Instead, the guidelines should be viewed as a tool in assisting governments in designing debt management reforms. According to the structure of the Guidelines for Public Debt Management, a review should focus on the following aspects:10

• Debt management objectives and coordination

– Are objectives well spelled out, and do they give adequate weight to risk over cost?

– Do debt managers and fiscal and monetary policy makers understand the ways in which their policy instruments interact, and are mechanisms in place to facilitate the exchange of information?

– Are contingent liabilities such as the bail-out costs of the banking sector and other key liabilities such as guarantees for public enterprises covered?

• Transparency and accountability

– Are the roles and responsibilities for agencies responsible for debt management clear and disclosed to the public?

– Is information on debt management policies and the regulations and proce­dures for the primary and secondary markets of government securities publicly disclosed?

– Are debt management activities annually audited?

• Institutional framework

– Is the legal authority to undertake financial transactions on the government’s behalf clear? Are institutions responsible for public debt management identi­fied?

– Are mandates and roles in debt management activities well divided and articu­lated?

– Are internal operational controls well managed according to international best practices? Do debt management information systems generate accurate debt records?

– Do debt managers receive appropriate legal advice, and do transactions incor­porate sound legal features?

• Debt management strategy and risk management framework

– Does the debt manager have access to useful methodologies and models to assess costs and risks (for example, the IMF’s debt sustainability templates)?

– Are risks—such as interest rate, rollover, and exchange rate risks—taken into account in borrowing decisions? Is the risk of the currency composition of
debt carefully considered, especially against the potential movements in the exchange rate that are a function of the size of the external deficit and of how closed the economy is? Is the risk of short-term or floating rate debt (espe­cially under fixed exchange rate regimes) appropriately assessed? Is the risk of increased cost of debt management and its effect on interest rates and debt sustainability reviewed? Are debt structures reviewed for “lumpiness” in cash flows? Are put options and covenants avoided that make it likely that a large number of payments will come due when the timing is unfortunate?

– Are stress tests regularly conducted?

• Development and maintenance of an efficient market for government securities

– Are debt management operations in the primary market transparent, predict­able, and, to the extent possible, on the basis of market-based mechanisms?

– Are the development of secondary markets and a broad investor basis being promoted? Are investors treated equitably?

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